Many financial planners and accountants tend to recommend that you hold your insurance cover in your super fund but is this really the right thing for you?
Paying for your insurance cover from your super might feel painless as it hides the cost of your insurance, however this may well have a massive impact on your retirement. It is important to understand the impact this can have on your retirement savings and other complications that may occur when you hold your insurance cover in super.
Owning and paying for insurance products through your Super may be problematic for you in the future.
WHY?
Your Super fund is there to secure an income for you in retirement, if your insurance premiums are been drawn from your super and you are not addressing this cost by making additional payments into super, your future retirement benefits will be severely impacted. By taking a few hundred dollars a month away, your Super investment balance will be impacted at retirement by an amount that could easily be in the tens of thousands, and may make you more reliant on finding other means to fund your lifestyle.
Recently I had a client come to me for a review of his insurances, after reviewing his cover it turned out that he was paying nearly $5,000 per year for his insurance that he held in his super, his income was around $70,000, so after insurance premiums and costs he only invested $1,500 into his super for the year, and his insurance premiums were set to increase. This had been setup years earlier and had not been reviewed, which is one of the reasons financial planners like putting insurance in super – it gets forgotten about and the financial planner doesn’t have to worry about reviewing it.
You need to ensure that you make additional payments into your Super to offset this loss.
Just paying an additional $100 extra a month into your Super can have a positive impact on your retirement balance, (compound interest working at its best) alternatively can you imagine what taking a few hundred dollars out will do?
Even for higher income earners insurance premiums will have a bearing on the amount you are contributing towards your retirement, remember there is a cap on how much you can contribute for the year, and If you exceed the cap, the excess will be taxed at a much higher rate. I’m sure most financial planners would agree that you should be getting as much money as you can into super to take advantage of the lower tax rules. It doesn’t make sense to use up the cap (which has been reducing in recent years) by paying your insurance premiums with it.
If your insurance premiums are been paid by your Super make sure you make additional contributions into your Super to offset the payments to ensure your investment keeps growing.
The tax benefit offset is not the only consideration you should be looking at, having insurance owned and paid for by your Superannuation has other complexities such as delays in payments, potential tax implications on claims payments and claims ownership issues, which we will discuss in our next article.
Superannuation is a fantastic product and a great vehicle to use to future proof you retirement and if set up properly and with consistent long term contributions will provide you with a fantastic lifestyle in retirement. Small decisions made early in life can have a large detrimental impact to your retirement savings so it is essential to make the correct choice for you and your future.
Make sure you get good advice that helps you understand the implications of holding your insurance in your super fund.